3.2.5 Total net investment loss
This topic explains the concept and assessment of a 'total net investment loss' (1.1.T.53) as a component of ATI (1.1.A.20) for the FTB, CCS and SBP income tests. Total net investment loss is made up of both NFIL and NRPL. This topic covers the following:
- net financial investment loss
- net rental property loss
- assessing NRPL - partnerships and trusts
- assessing NRPL - members of a couple
- assessing NRPL - multiple properties, and
- calculating ATI where 'taxable income or loss' figure on the income tax return is a negative figure.
Assessing NFIL - general
For FA purposes, 'financial investment' includes the following:
- a share in a company
- an interest in a managed investment scheme (within the meaning of the Corporations Act 2001)
- a forestry interest in a forestry managed investment scheme
- a right or option in respect of an investment referred to in paragraph (a), (b) or (c)
- an investment of a like nature to any of those referred to in paragraphs (a) to (d).
The income and taxation legislation allows a NFIL in the calculation of a person's taxable income. NFIL is the amount by which allowable deductions in respect of the financial investment/s exceed gross income from those investment/s. For example, a NFIL would include the amount by which deductible interest expenses on a loan taken out to buy shares exceeds the dividend income from those shares.
Deductions a person may claim for an investment include, but are not limited to, expenses the individual pays to:
- borrow money to make an investment purchase
- manage their investments
- obtain advice relating to changes in the mix of their investments.
Note: A NFIL does not include any capital gains or losses, such as when a parcel of shares is sold for less than the cost of their acquisition. A NFIL is simply the amount by which a person's income tax deductions exceed the income they obtain from those financial investments.
Example: Gerard has a share portfolio. Gerard's dividend income for the financial year is $7,000 and he can claim interest expenses of $10,000. Gerard also sold some of his shares during the financial year and made a $20,000 capital loss. Gerard's NFIL is the amount by which the deductions he can claim on his shares exceed the income he receives from them. In calculating his NFIL Gerard's capital loss is not taken into account. This means Gerard's NFIL is $3,000.
Although NFIL is deductible for taxation purposes, NFIL is required to be added back as a component of an individual's ATI in determining eligibility for FTB, CCS and SBP.
Example: In the last financial year, Simon has a salary income of $100,000. Simon also invested in shares and made a NFIL of $5,000. The ATO assessed his taxable income for the year as $95,000. For FA purposes however, Simon's income will be $100,000.
Act reference: FAAct Schedule 3 Adjusted taxable income
Assessing NRPL - general
The income taxation legislation allows a NRPL in the calculation of a person's taxable income. For FTB, CCS and SBP purposes, NRPL is added back to the person's taxable income as part of their ATI.
Example: Jane made a NRPL on a rental property of $5,000. The ATO assessed her taxable income as $25,000. For FA purposes, the $5,000 will be added back to Jane's taxable income; her ATI will be $30,000.
For the purposes of the SBP income test, only the amount of the NRPL that has been incurred in the relevant 6 month income test period is included. For further details on how the income test period is defined for SBP see 4.15.1.
The amount of NRPL that an individual, and/or their partner (1.1.P.30), receives from rental property is assessed for ATI. This applies to residential and commercial land and buildings, regardless of:
- the nature of the ownership, or
- Example: The person may be an owner, mortgagee, lessee or lessor.
- whether the income results from a property investment or not.
- Explanation: If part of a person's principal home is rented out, any NRPL will be assessed as well as any NRPL a person has from investment properties.
NRPL does not apply to personal property such as cars.
Act reference: FAAct Schedule 3 Adjusted taxable income
Policy reference: FA Guide 2.12.1 SBP eligibility criteria
NRPL - partnerships & trusts
Generally, co-owners (i.e. tenants-in-common) of rental properties, such as a husband and wife, are regarded as investors who are not carrying on a business. However, for tax purposes they are deemed to be a (tax law) partnership, but do not lodge a partnership return as they are not in a (general law) partnership carrying on a business. In this situation, each co-owner will need to include their share of rent and expenses in their individual income tax returns, based on their legal interest in the property. Any NRPL is shown in the individual tax return and is added back in the calculation of ATI.
If a partnership is carrying on a rental property business, any NRPL will be reflected in the partners' individual tax return as a net non-primary production distribution loss. This also applies to a partnership carrying on a business but which owns a rental property. The NRPL is added back in the calculation of ATI. A general law partnership means income from a partnership which is declared to the ATO as partnership income. If a person and their partner jointly own a rental property, this is not regarded as being a general law partnership unless the income from the property is correctly reported to the ATO as partnership income.
A NRPL made by a trust cannot be distributed to individual beneficiaries. A trust loss must be quarantined in the trust and can only be carried forward to offset against the trust's income in future years. There is nothing to add back in this instance in the calculation of ATI.
Assessing NRPL - members of a couple
An individual's and their partner's ATI is calculated separately, before being combined.
Example: An individual and their partner provide the following income details:
|Income details||Individual ($)||Partner ($)|
|Income from wages||1,000||33,000|
|Share of loss from rental property||4,000||4,000|
|Taxable income or loss||(3,000)
*Taken to be nil
The combined ATI of the couple is $4,000 + $33,000 = $37,000.
Assessing NRPL - multiple properties
If a person has more than one rental property and there is a combination of losses and gains, these are offset and the NRPL provisions apply only if there is an overall NRPL.
Example: A person has 2 rental properties, one made a profit of $3,000 and the other made a loss of $4,000. In this case, the gain of $3,000 is offset against the loss of $4,000 giving a NRPL of $1,000. This $1,000 would be the loss declared to the ATO and is the amount that would be assessed as the NRPL for ATI purposes.
Calculating ATI where the 'taxable income or loss' figure on the income tax return is a negative figure
If a person's taxable income or loss is calculated to be a negative value, it is taken to be zero, before adding the NRPL and other income components for the purposes of calculating ATI.
Explanation: A component of ATI is 'taxable income'. The definition of taxable income provides a methodology where taxable income cannot be less than NIL. Consequently, though taxation legislation allows for a tax loss to be carried forward to the next income year, nevertheless a tax loss is treated as NIL taxable income for ATI purposes.
Example: A person provides the following estimate of their income:
|Income details||Estimate ($)|
|Income from wages||10,000|
|Loss from rental property||15,000|
|Taxable income or loss||(5,000)|
The taxable income for ATI purposes is taken to be zero and the total net investment loss of $15,000 is added back in, resulting in an ATI of $15,000.
Note: For the purposes of the SBP income test, the amount added back in this example would be only that amount for the loss incurred during the relevant 6 months income test period. This would be $7,500 if the loss was spread evenly throughout the income year and the 6 month income test period fell entirely within the income year.